When the unthinkable becomes normal
The pandemic represented a global challenge, and structurally changed the demand for goods and services. Here are the scenarios for the gaming world, best for operators who also focus on online and retail.
by Michael Haile
Francois Rabelais, the French Renaissance writer and humanist once said, “Nature abhors vacuum”. So does economics. Covid-19 has caused significant disruption to economies and societies on an unprecedented scale. Covid-19 has cost hundreds of thousands of human lives globally, presented policy makers with pressing challenges, and exposed the weaknesses of economic and social foundations worldwide. The evolution and implications of the pandemic crisis are still unfolding, and the short term and long-term impacts of the pandemic are still highly uncertain. To effectively capitalize, or survive, the challenges and opportunities such a disruption presents, economic and social actors require resilience, appropriate and new organizational capabilities, innovation, and entrepreneurship.
When the coronavirus pandemic began in 2020 no one knew for how long life would be disrupted. At the peak of restrictions, about 3.6bn people were subject to mandatory lockdowns. However, societies were surprisingly quick to adapt: working and learning from home, and communicating in novel ways. However, there was constant discussion when “normalcy” would return. Even after the rollout of vaccines, normal never returned as the world has irremediably shifted. Everyone has to face to the fact there will no return to the pre-crisis economic and social environment.
Firms are starting to realise that there have been structural shifts and permanent changes to levels of demand for particular goods and services. Businesses in the consumer goods and retail industries should not expect the recovery to follow the normal post-recession pattern because Covid did not produce a normal recession. Covid 19 is unprecedented. The range of possible developments is much wider than usual and hinges on completely different factors, such as the speed of vaccination campaigns and the potential unleashing of pent-up demand. Experts are uncertain on the shape the curve of the economic crisis will take, given the unprecedented nature of the Covid-19 crisis. Some experts expect V-shaped post pandemic recovery, with a deep decline in Gdp followed by a rapid recovery. Others believe a U-shaped crisis, with a long-term decline (albeit less extreme) and a gradual recovery. However, the fear is an L-shape economic crisis, a decline followed by a long-term depression without real recovery for a very long time. So extraordinary and uncertain the effects of the pandemic are it is even possible to experience mixed trajectories: economic recovery altering over time. The only certainty is the nature of this crisis will be unlike any economic crisis of the past. The State enforced period of inactivity in so many countries hit by the pandemic, aimed at flattening the infection curve, led to an almost overnight abrupt fall in economic activity.
What’s around the corner?
Selected countries Gdp growth projections (2020-2022)
|Other advanced economies||-1.9||4.6||3.7|
Source- International Monetary Fund
The International Monetary Fund (IMF) forecasts that the World Gdp for 2021 and 2022 will be 5.7% and 4.5% respectively. Euro-zone will grow at a slightly slower pace, 5.0% in 2021 and 4.3% in 2022.
The European economy suffered considerably in 2020: two waves of Covid-19 infections, a high death toll and two lockdowns in most countries. The consequent economic recession was the deepest on record. While most of Europe is currently risking a third lockdown, vaccination programmes are making progress, providing much-needed resilience. What is clear is that consumer expenditure, the largest component of gross domestic product and its main growth drive, will determine to a large degree how Europe emerges from the recession. The calculation is difficult due to the unique nature of the recession, which is basically a State sanctioned closure of entire economic sectors to combat the virus.
The labour market and households’ expectations of its future trend is the most important determinant of household spending. The economic crisis provoked by the virus presents an unusual situation as the unemployment rate increased by much less than would be historically consistent with an economic shock of this magnitude. This has been partly the result of policy measures governments put in place to mitigate the impact of the pandemic on the labour market. It was widely expected that once lockdown measures were removed the recovery would be led by consumer consumptions driven by pent up demand as households were not able to consume as they wished as they were locked in their homes. However, the initial surge in consumer consumption was soon followed by a sharp decline in consumer sentiment. A major contributor to the declining economic sentiment were shortages in materials and upstream products. A combination of rapidly rising demand and reduced production capacities during the pandemic led to serious shortages that held back industrial production. In Germany, over 70% of companies claimed that supply shortages obstruct their production. In the automotive industry, over 90% suffered shortages; in the engineering sector, it was over 80%. Over the last three decades, the corresponding values never amounted to more than 20%. Interrupted supply chains pose a serious threat to recovery in what is an ever connected and globalised economic structure.
Since the beginning of 2021, headline consumer price index (CPI) inflation has increased in advanced and emerging market economies, driven by rising demand, input shortages, and rapidly rising commodity prices. The inflation rate in the Eurozone stood at 3.4% in September, the highest in the last 13 years. Inflation in Germany jumped to 4.1% (the fastest pace of consumer price increases in nearly thirty years), while inflation in Spain reached 4.0%, in Italy 3.0%, and in France 2.7%. The prices of energy, groceries, and industrial goods rose the fastest. Interestingly, core inflation rate which excludes energy and food, only rose by 1.9%. Looking ahead, headline inflation is projected to peak in the final months of 2021, with inflation expected back to pre-pandemic levels by mid-2022 for both advanced and emerging economies. Household disposable income (income minus expenditure on essentials such as housing and food) is the one of the most important determinants for consumer consumption, particularly in leisure related activities. A rising inflation rate, when particularly focused on primary goods such as energy and food, eats into the disposable income that households might otherwise spend on other goods or activities.
To understand how European consumers might emerge from the crisis, it is crucial to understand how the recession differs from previous ones. It is becoming clear that some consumer behaviours are not temporary but are here to stay. Even after the end of lockdowns, the shift to digital is consolidating. Footfall in retail establishments in Europe, and other developed economies, is below the levels of the pre-pandemic era and online sales are proving remarkably robust in light of the opening up of non-essential retail. Most industry experts expect online sales to continue to grow at above market rates for the foreseeable future, driven by both consumer demand and business investments in increasing online capacity and capability. Online sales are predicted to reach a colossal US $4.2 trillion by the end of 2021.
2020/21 proved to be a transformational years for retail – offering a compelling case for a digital first approach as stores closed due to Covid-19 restrictions and consumers were told to shop from home. As we have seen the shift to digital accelerate and more of their business move online, retailers have invested in developing a more digital first approach, both in terms of the need to be digital by design and being more thoughtful about the customer experience, as they re-evaluate the role of the store in the modern retail platform. Leisure enterprises, such as gambling operators, who own online and retail operations, are particularly suited to capitalise of this transformation. Marketing experts believe experience will be an essential to the future of the store. However, cost pressures will not decrease and investments in experience need to ensure that they make sense from a brand perspective, add value to consumers, and deliver a commercial return. On the innovation front, the worlds of gaming, entertainment and marketing are converging, giving way to new experiential partnerships.
A careful analysis suggests that consumers across Europe are sitting on over Euro 450 billion of savings. Conditions seem perfect for a strong consumer-led recovery at the end of 2021 and into 2022 if the pandemic does oblige governments into a third lockdown.
What firms and policy makers have learnt from Covid is that the world is undergoing increasingly rapid, unpredictable, and unprecedented change and firms need to find new approaches. Covid variants will continue to appear, catastrophic events driven by climate change, economic disruption and geopolitical uncertainties will grow more frequent and less predictable. In the pandemic shaped new environment, where the future is uncertain and change comes fast, companies will have to learn to look beyond short-term performance and are obliged to be able not only to withstand unpredictable threat or change but to emerge stronger. In short, they need to be agile and resilient.